ELECTRONICS, SOFTWARE & SERVICES Managing the … · ELECTRONICS, SOFTWARE & SERVICES Managing the Risks of Counterfeiting ... the audit, tax, and advisory ... Counterfeiting in the

ELECTRONICS, SOFTWARE & SERVICES

Managing the Risks of Counterfeiting in the Information Technology Industry

INFORMATION, COMMUNICATIONS & ENTERTAINMENT

Contents

1 Executive Summary

2 Most Profitable Criminal Venture

5 Lessons from Other Industries

6 Early Warning Signs

8 China: A Favorable Environment for Counterfeiters

10 Mitigating Pervasive Counterfeiting

13 Communicating Effectively

14 Putting It All Together

15 KPMG’s Electronics, Software & Services Practice

16 About AGMA

Executive Summary

Counterfeiting is among the most challenging issues facing theinformation technology (IT) industry today. Illegal replicas ofbrand-name high tech products are flooding the marketplace,cutting into legitimate companies’ revenue and reducing theirability to invest in research and development (R&D). Proliferationof technology used to make computers, servers, and a host ofhigh tech products—as well as a lack of regulatory enforcementin developing nations—is accelerating counterfeiting. It is nowestimated that as much as 10 percent of all high tech productssold globally are counterfeit.

The sight of street-corner vendors selling bootlegged CDs, DVDs, apparel, andjewelry is commonplace—and now counterfeit high tech products are becomingwidely replicated by illicit producers and sold over the Internet. The public, however,is becoming more aware of the dangers posed by counterfeiting and the criminalorganizations behind it, and many people are fighting back. Reports of connectionsbetween counterfeiters and terrorist organizations—and speculation that revenuegenerated by counterfeiters is helping to fund terrorism—have helped spurincreased resistance.

Still, some governments are not devoting sufficient resources to help curtail coun-terfeiting activities, which generate billions of dollars each year in illegal revenue. As a result, industry associations and legitimate governments are teaming with lawenforcement agencies to put pressure on egregious offenders and stem the flow ofcounterfeit products. Some IT companies are also conducting independent investiga-tions, and the industry as a whole is working in concert with authorities to root outand prosecute offenders within their home countries.

Through heightened awareness of early warning signs—and increased vigilance inidentifying and punishing both the manufacturers and distributors of counterfeitgoods—progress is being made. But a coordinated, comprehensive program target-ing the sale and distribution of counterfeit high tech products is necessary to protect consumers from poor quality goods as well as help secure the future of theIT industry.

KPMG LLP and the Alliance for Gray Market and Counterfeit Abatement (AGMA)conducted a study to help IT executives better understand the risks introduced bycounterfeiting—and the steps that can be taken to help mitigate that risk. This white paper outlines the results of the study, which includes interviews with leadingexecutives who provide insights to help safeguard brand-name products and reducecounterfeiters’ ability to further harm the IT industry.

KPMG LLP, the audit, tax, and advisory firm, in cooperation with the Alliance forGray Market and Counterfeit Abatement, conducted a study to help IT executivesbetter understand the causes of counterfeiting and its effects on IT customers,authorized distribution partners, and the IT industry overall.

“We found that counterfeiting and gray market channels often go hand-in-hand, soit’s logical for AGMA to concern itself with both issues,” says Marie Myers, AGMApresident. “AGMA is dedicated to tackling the counterfeit challenge faced by ourmember companies and the potential harm counterfeiting causes to end customersand channel partners as well.”

Most people still associate counterfeiting with currency, or a shady-looking manwith a string of watches inside his lapel whispering, “Wanna buy a Rolex?” Butpeople are becoming more conscious of the fact that counterfeiting is a much biggerproblem. It poses a significant threat to leading companies in industries that formthe basis of our global economy. By reducing revenue and harming brand equity,counterfeiting of IT and electronics products is eroding the integrity of the “supplyand demand” business model.

Through research, we found that the most effective countermeasures to counterfeitingwere driven from the top down into an organization by its senior-most executives.This suggests that, in the IT and electronics industries, it is important that the risksof counterfeiting be addressed at the highest levels of management. Each year,counterfeiters are siphoning off an increasing portion of the industries’ revenue, sothe time to act is now.

The shady man on the street is an obvious seller of counterfeits. Most people whobuy a “Gucci” handbag from a street vendor for $10 know it is a fake when theybuy it. So if the strap breaks the following week, they throw it in the trash and chidethemselves for wasting $10. But an unwary online purchaser of a $2,500 computermay not be as understanding when it breaks, especially when he or she finds outthat the product is not under warranty because it is counterfeit.

2 Counterfeiting in the Information Technology Industry

Most Profitable Criminal Venture

Despite IT products’ sophisticated design and complex manufacturing, counter-

feiting is a growing problem. As many as one in ten IT products sold may actually

be counterfeit, according to interviews conducted with electronics industry exec-

utives. In some specific product cases the percentage of counterfeits may, in fact,

be even higher (e.g., network interface cards). Conservatively estimated, this

equates to about US$100 billion of global IT industry revenue that is lost to coun-

terfeiters annually. Indeed, according to estimates by the International Chamber

of Commerce, all counterfeit goods accounted for 6 percent of world trade in

2003, valued at a whopping US$456 billion.

Unlike watches, motion picture DVDs, clothing, and music recordings, far morecounterfeit IT items are hawked over the Internet than on street corners. Some ofthe largest distribution centers are trade markets in southern China that are suppliedby nearby manufacturers. Rather than just mom-and-pop operations dealing ineasily copied packaging, many counterfeit IT products are produced using hightechnology processes. As a result, the end product can run the gamut from a shoddyknock-off to a replica so well executed that even experts can be fooled.

“The U.S. Patent and Trademark Office says that 66 percent of the counterfeit goodsseized at American borders now come from mainland China, up from 16 percentfive years ago,” reports Fortune magazine in its January 10, 2005, issue. Accordingto Fortune—and pointing to the harm being wrought on China’s technology entre-preneurs—Chinese companies are also beginning to seek governmental protectionfrom counterfeiters within their own country’s borders.

Many of the executives we interviewed believe that organized crime is involved inboth the manufacture and distribution of counterfeit products of all kinds. Criminalfactions, including terrorist groups, are suspected of using counterfeiting as a meansof funding criminal enterprises or laundering money gained from nefarious activi-ties. According to Harley Lewin, an attorney who has been pursuing counterfeitersin China for more than 20 years, counterfeiting “is the most profitable criminalventure.”

Juan Zarate, the U.S. Department of the Treasury’s assistant secretary for terroristfinancing, agrees, saying terror groups became more sophisticated in funding theiractivities as the United States and other countries cracked down on money launder-ing through banks and other financial institutions. Counterfeiting is one of themethods used by terrorists to raise cash.

The price of an authentic product produced by a legitimate original equipmentmanufacturer (OEM) reflects the cost of research and development, brand development, manufacturing, marketing, and sales. By paying only the cost ofmanufacturing and sales, the counterfeiter is able to sell the counterfeit productbelow the price of the authentic one and make a significant profit.

For the company whose products are being counterfeited, the losses are doublydamaging. Counterfeits not only compete with authentic products for revenue, theycan also harm a brand’s marketplace equity, leaving the brand-holder with theproblem of diminishing demand and rising product support costs.

Counterfeiting in the Information Technology Industry 3

The U.S. Patent andTrademark Office saysthat 66 percent of thecounterfeit goods seizedat American borders nowcome from mainlandChina.

—FORTUNE MAGAZINE

“Counterfeiting is one of the most significant threats to the free market,” saysRichard Girgenti, partner in charge of the KPMG ForensicSM practice. “It not onlysteals the value of intellectual capital, it stifles innovation and robs customers of thequality they expect from a brand.”

Despite the difficulties involved inprosecuting counterfeiters acrossnational boundaries with inconsistentlaws, the economic benefits ofmaking it more difficult for counter-feiters to copy and distribute ITproducts are clear.

Case in point: Acting on a tipreceived through the AGMA tip line,Hewlett-Packard moved fast to locatewarehouses storing millions ofdollars worth of counterfeit goods.Through surveillance, they traced thesales and supply chain in coordination

with international law enforcement to locate the illegal manufacturing source. Thecase spanned two continents and five countries, resulting in the seizure of thousandsof counterfeit IT products, closure of several “front” companies, and legal sanctionsagainst entities in multiple countries involved in manufacture and distribution ofcounterfeits.


The pharmaceuticals industry, for example, estimates that in some markets as muchas half of certain products are counterfeit. That is cause for serious concern, notonly because revenue and profits are being stolen but also due to threats to thehealth and safety of consumers.

In June 2004, Seoul, South Korea, police raided more than 100 pharmacies andseized large amounts of counterfeit Cialis® and Viagra®. These seizures were theresult of a collaborative effort between the police and pharmaceuticals companies.Much of the initial investigation and efforts in building the case and tracking thecounterfeiters was the result of work by the companies’ own anticounterfeitingprograms.

In 2003, South Korea imported US$1.1 billion in drugs. This, plus its proximity toChina—a hub of counterfeit drug production—makes South Korea an attractivemarket for counterfeit drugs. But this is not an isolated example. According to drugindustry estimates, in many developing countries up to 50 percent of available drugsare counterfeit; worldwide, the total is about 10 percent. India is also a problematicregion for counterfeit drug production because the country only recently began torecognize the legality of patents.

Both IT and pharmaceuticals companies rely heavily on costly R&D for creatingnew products. Each manufactures products using expensive capital equipment andeach invests heavily in global marketing and distribution. Research conducted byKPMG LLP and AGMA identified many similarities between IT and more matureindustries regarding early warning signs of counterfeiting and the countermeasuresbeing applied.


Lessons from Other Industries

The sale of counterfeit software and music CDs, movie DVDs, and, of course,

high-end watches is widespread.The same is true of fashion sunglasses and

popular-brand clothing and cosmetics. The common element in all of these

cases is illegal use of a brand name—one that is well known and commands

high prices. For the IT industry, the problem of counterfeiting is relatively

recent. Therefore, we interviewed executives in industries where counterfeiting

has been a long-standing problem—including pharmaceuticals, packaged goods,

and motor vehicles—to learn from their experience.

In many developing countries up to 50 percentof available drugs arecounterfeit; worldwide,the total is about 10 percent.

Sudden Drop in Raw-Materials Orders

Many IT companies engage third-party contract manufacturers to produce theirproducts. In some cases, component procurement is left entirely up to the contractmanufacturer; in others, the OEM may procure them. In the OEM case, a suddendrop in raw-materials orders may be an early indicator of counterfeit part substitu-tion. This is especially true if the volume of shipped devices is fairly constant. If acontractor is not buying the parts from the OEM, where are they coming from? Ifthe contract manufacturer is not using authorized components, then products builtusing substitutes may be considered counterfeit. But in every case, use of unautho-rized components risks compromising the end product’s quality.

“Where high product quality benefits a company’s brand, counterfeiting becomes amajor assault on both brand and revenue,” says Rich Rutledge, general manager ofthe PC components at Western Digital Corporation.

Increased Orders for Proprietary Components

In some cases, OEMs sell both manufactured goods and raw materials. For exam-ple, a maker of plug-in network interface cards based on its proprietary chip mayalso sell just those chips to motherboard providers who offer a built-in networkinterface. Obviously, the OEM has no way of really knowing if the chip it is sellingwill be used on the intended motherboard, or used to make counterfeit plug-inboards. Therefore, another warning sign is increasing volumes of orders for compo-nents without a commensurate increase in their legitimate target products.

Increased Grey-Market Availability

KPMG LLP’s white paper The Grey Market, published in 2003, explains howlegitimate products often flow through unauthorized channels. These grey-marketchannels can also facilitate distribution for counterfeiters. Grey-market distributorshave no way of knowing how much product an OEM is making. Thus, they have no way of knowing whether sudden influxes of products into their channels areredirected legitimate OEM products or counterfeits. It is imperative for the OEM topay close attention to the quantities of their products flowing through unauthorizedchannels. An upsurge may be a warning sign of counterfeits entering through thosesales channels.


Early Warning Signs

Counterfeiters do not announce their intention to copy branded products, and

discovery often occurs by chance. But there are early indications that can signal

when a company has a counterfeiting problem.We interviewed several profes-

sionals from high technology companies who are responsible for responding to

counterfeiting.They identified the early warning signs described below.

Where high product qual-ity benefits a company’sbrand, counterfeitingbecomes a major assaulton both brand andrevenue.

—RICH RUTLEDGE,WESTERN DIGITAL

CORPORATION

Increase in Service Returns

Most OEMs see the first tangible proofof counterfeiting when these units aresent back for service. The best copiesmay go undetected even by a technician,but other copies can be readily identi-fied because of obvious differences incomponents or board layout. In general,OEMs know approximately how manyproducts are likely to be returned forservice. When there is a spike inreturns, it may indicate either an OEMquality problem or counterfeiting.

Large Volume of Discounted Product

Available

Many OEMs actively monitor market-place pricing through Internet tools and other means, and can detect when largequantities of product become available on the open market at unusually low prices.These price indicators can signal counterfeits entering the marketplace.


Whether it’s computers, communications systems, drugs, or basketball shoes, mostexecutives agree that southern China is a focal point of counterfeiting. “Every year25 percent of our business is eaten away by counterfeits,” according to Daniel Chow,former in-house legal counsel for a large multinational enterprise with significantinvestments in China and secretary for the China Anti-Counterfeiting Coalition, an ad hoc group of multinational enterprises with serious counterfeiting problems in China. In testimony before a subcommittee for Senate Governmental Affairs inApril 2004, Chow said, “In terms of size, scope, and magnitude, trademark counter-feiting in China is considered by many to be the most serious counterfeiting problemin world history.”

Chow, who is the Robert J. Nordstrom Designated Professor of Law at the MichaelE. Moritz College of Law, The Ohio State University, added, “Brand owners inChina estimate that 15 to 20 percent of all well-known brands in China are counter-feit and estimate their losses to be in the tens of billions of dollars.”

Based on Chow’s testimony, three key factors are the root causes of China’s counter-feiting problem:

• Foreign direct investment with advanced technology

• Direct and indirect state support of counterfeiting, combined with protectionism

• Ineffective legal enforcement

FDI in China during 2003 wasUS$57 billion, according to theUnited Nations Conference on Tradeand Development. Historically, theinflux of FDI led to a concentrationof legitimate, joint venture manufac-turing in Fujian and Guangdongprovinces. Not coincidentally, thebulk of Chinese counterfeit manu-facturing is also centered there.Manufacturing processes of legiti-mate companies in these provincescould easily “migrate” to illegitimatefactories nearby.


China: A Favorable Environment forCounterfeiters

China attracts a huge influx of foreign direct investment (FDI) resulting in high

technology capability with adopted know-how, accessible distribution in densely

populated areas, and inconsistent regulatory enforcement.These factors—

coupled with low wage rates, high unemployment, and a largely uneducated

workforce—create a favorable setting for counterfeiting.

In China, large wholesale markets are common to densely populated areas withgood access to transportation. These are known hubs of counterfeit distribution.

The third factor is ineffective laws and deterrents. China’s wholesale markets are theaegis of local administrations of industry and commerce (AICs). The AICs createand regulate them—a classic case of conflict of interest. The AICs receive revenuefrom the booth owners in the wholesale market and, therefore, are reluctant to doanything to diminish their revenue base, such as enforcing national laws againstdistributing counterfeits.

China’s government has passed laws to satisfy the concerns of its trading partners,but it lacks coordinated efforts between national and local authorities to quellblatant manufacturing, distribution, and sale of counterfeit product. “We conducteda raid on an aftermarket dealer in China,” says Linda Heban, vice president andchief trademark counsel for Harley-Davidson. “Actually, we had the AIC conductthe raid. But the problem is, when you stop one, another pops up.”

Recently, encouraging signs are emerging from the Chinese government that pointto the realization that counterfeiting could hinder economic development in thecountry.

According to China Daily, China’s recent release of the judicial interpretation onintellectual property rights (IPR) infringement criminal cases attests to the country’supdated efforts to fight the crime. The 17-article interpretation, which took effect inDecember 2004, materializes the legal principles in the previous IPR-related laws.

The move fully demonstrates the country’s determination to stamp out IPR-infringingcrimes, which are costly not only to the victimized organizations and individuals butalso to the country’s overall investment and market environment. Rampant piracy,for example, will lead to less confidence in innovation and independent develop-ment of technology.


Encouraging signs areemerging from theChinese government thatpoint to the realizationthat counterfeiting couldhinder economic develop-ment in the country.

The following list of anticounterfeiting tactics was identified by executives ofleading high tech companies, and includes techniques, pioneered by more matureindustries, that are now being adapted by leading electronics companies.

• Designing-in and employing copy-resistant and anticounterfeit technologies on all products

• Continually evaluating anticounterfeit technologies, including radio frequencyidentification (RFID), security labeling, and other packaging technologies andtechniques

• Coordinating with U.S. and international organizations and trade alliances such asAGMA, the International AntiCounterfeiting Coalition, and U.S. Immigration andCustoms Enforcement (ICE) on responding to counterfeiting issues

• Partnering with international law enforcement and customs agencies to researchand monitor the traffic in counterfeit IT products, and pursuing infringers

• Developing and deploying anticounterfeit education and training programs forinternal and external stakeholders, including end users, channel distribution part-ners, and service and sales employees

• Signing product distribution agreements that contain specific language to protectthe brand, including provisions for auditing and enforcement

• Ongoing monitoring of distribution streams of counterfeit products, such as Internetbrokers, direct sales, retail outlets, wholesalers, and Internet trade Web sites

• Taking enforcement action against counterfeiting and other illegal operationsusing civil and criminal remedies

• Creating an internal anticounterfeiting task force, including stakeholders fromfinance, sales, and service organizations from all “hot-spot” regions in the world

• Layering anticounterfeiting controls into product and packaging designs, as wellas into manufacturing, sales, order processing, services, and warranty processes

• Deploying a robust communications plan targeted at specific audiences, includingend users, channel distribution partners, third-party service providers, and themanufacturers and resellers of counterfeit products

1 0 Counterfeiting in the Information Technology Industry

Mitigating Pervasive Counterfeiting

“High technology companies intent on reducing counterfeiting have no single

‘magic bullet’ at their disposal,” says Peter Hunt, director of supply chain,

product, and brand security for Hewlett-Packard. “Successful resolution of the

problem requires a multifaceted anticounterfeiting program, dedicated

resources, and leadership from the top of the company.”

It is really a combinationof efforts—some proac-tive and some reactive—constituting a prevention,detection, and responsestrategy, that is mosteffective in mitigatingpervasive counterfeiting.

—RICHARD GIRGENTI,KPMG FORENSIC

• Providing a simple means—such as through the AGMA tip line—by whichsuspected product, Web site, or other infringements can be reported—andresponding to such reports

• Creating a global brand protection function to manage the anticounterfeitingprogram for the company

As Hewlett-Packard’s Hunt explains, no single tactic would be effective, but thecombination of many tactics, applied consistently, will eventually yield benefits.

“It is really a combination of efforts—some proactive and some reactive—con-stituting a prevention, detection, and response strategy that is most effective inmitigating pervasive counterfeiting,” says KPMG’s Girgenti. “It’s the holisticapproach, rather than single rifle shots, that is most likely to succeed,” adds Hunt.

Following are additional tactics that can bolster a holistic prevention, detection, andresponse strategy.

Identifying Geographical “Hotspots”

There are common characteristics among countries where counterfeiting is likely tobe a problem, including large populations, low skill levels with high unemployment,low labor rates, weak law enforcement, and low government intervention. Brazil,China, India, Malaysia, Paraguay, and former Eastern Bloc countries fit this profile.

Make OEM Products Difficult to Copy

The second imperative is to make it difficult to copy legitimate products. In retrospect, the high tech industry first followed the mantra of “design for manu-facturability.” Later, as components became more complex, the mantra became“design for testability.” Perhaps the industry needs a new mantra: “Design toprevent counterfeiting.”

Better Monitoring and Auditing of Contractors, Supply Chain, and Distributors

Nearly all interviewees agreed that contract manufacturing poses greater counter-feiting risks than internal manufacturing. More stringent contracts and auditing,however, can help reduce the risk. They enhance both prevention and detection, andthey spell out specific remediation plans. It’s also important to consider the supplychain. Here, too, better monitoring enables prevention and detection.

“In the high tech industry, contract manufacturing is assumed. However our globalsupply operations evolved well beyond that,” says John Haydon, vice president ofglobal supply management for Nortel Networks Limited. “We’ve outsourced parts ofthe actual supply chain. In such complex outsourcing environments you have to workvery closely with your outsourcing partners to minimize risks of counterfeiting.”

Counterfeiting in the Information Technology Industry 1 1

Strong Response

A solid effort at prevention can diminish the need for detection and response.However, relying on prevention alone can cause you to lose sight of the biggerproblem. Make sure the detection effort is strong (e.g., monitoring and auditing)but also be prepared to actively help law enforcement and other authorities. Somecompanies will even provide transportation for local authorities that plan to “raid”a suspected manufacturer or distributor. Others provide local law enforcement withtools it cannot afford to buy.

Establish Priorities and Build an Anticounterfeiting Organization

Unlike early warning signs, which can be detected without special organizationalunderpinnings, the above tactics require dedicated support. Therefore, prioritizationis essential, as no company has unlimited resources for fighting counterfeiters. It’simportant to focus on the products that are most likely to be copied. Do the samefor contract manufacturing and supply-chain vendors. Try to identify those who putyou most at risk in terms of financial loss and damage to your brand. With regard toemployees, be clear about work methods, but set solid boundaries with regard toactivities that can increase counterfeiting. Be clear about the importance of adheringto security policies.

Basing People Locally

Counterfeiting mitigation is not a remote activity. You can only do so much from acentralized location. You need people to be present in key locations so they cancarry out anticounterfeiting tactics.


Company Employees

Your internal people need to be aware of and properly trained to understand theproblem and how they can help deal with it. This includes everyone from a repairtechnician who thinks a return may be counterfeit to a call center person explainingto a service customer that a product may be counterfeit.

Business Partners

Distributors, authorized resellers, and contract manufacturers need to be part of thesolution. They need to understand the importance of ferreting out counterfeit productsand being on the same team as you.

Independent Distributors

Some companies avoid communicating with independent distributors as a way ofshowing their disapproval of grey-market activities. This, however, can work againstthem because independent distributors are the likely channels for counterfeit products,many of them unwittingly. An open communications channel allows them to queryOEMs about suspicious products and help keep counterfeit products out of circulation.

National and Local Governments

In some countries it’s important to communicate with both national and localgovernments. Coordinated pressure on national governments may help pass legisla-tion that offers intellectual property more protection. Individualized attention tolocal governments may help to enforce the laws where the need is greatest.

Your Customers

Customer communication is also important, but requires delicacy. You do not wantto create an impression that your product is being heavily counterfeited; you dowant customers to take responsibility for buying from authorized sources. Everycompany must decide for itself to what degree it will accommodate customers, butthe key message in all cases needs to be “let the buyer beware” when purchasingfrom independent channels. Consumers should be encouraged to buy from author-ized sources or directly from manufacturers to avoid counterfeits and to ensureproducts are fully warranted.

Industry Groups

As any security organization will attest, benchmarking, sharing best practices, andpooling information are important elements of an anticounterfeiting strategy. A firststep is benchmarking against what other companies have done or are doing. Industryalliances such as AGMA can be great forums for benchmarking and sharing best-practice ideas, and for innovating new ideas.


Communicating Effectively

Communication plays a major role in counterfeiting mitigation.We have identi-

fied six separate stakeholder groups that should be in the communication loop.

Anticounterfeiting programs benefit most from high-level sponsorship within acompany—ideally at the executive level. Executive leadership will drive receptivityand participation in education and training programs that can help mitigate thethreat of counterfeiting.

Board members and audit committees should also ask for evidence that counterfeit-ing is not materially compromising a company’s financial results. And, they shouldrequire the internal auditor to report on the company’s anticounterfeiting measures.Whatever approach a company adopts, it should be tailored to the company’sspecific issues. Once identified, the needs should be prioritized and organized forswift and decisive action. The people chosen, as well as their tasks and activities,should adhere to clearly defined methods and policies. This group should beresponsible for helping to detect, respond to, and prevent instances of counterfeit-ing, including encouraging the engineering function to design products that areharder to copy. It should have “feelers” into internal and external data sources thatcan help monitor and audit supply, manufacturing, and distribution. It should beempowered to collaborate with industry groups that specialize in helping companiesfight counterfeiting.

The organization should also have people permanently located in countries deemedhigh risk. This will allow more effective detection and quicker response. And, whencounterfeiting is detected, the company must be prepared to take a tough, prosecu-torial stance. Ideally, every company’s objective should be becoming the leastattractive counterfeiting target in its industry.


Putting It All Together

When counterfeiting isdetected, the companymust be prepared to takea tough, prosecutorialstance.

No anticounterfeiting effort is entirely foolproof, but the better ones can make a

significant difference.The products most likely to be counterfeited are those with

broad brand appeal, high volume, and respectable margins. OEMs should make

these products more difficult to copy. Just as pharmaceutical companies have

trained us not to accept a bottle with a broken seal, high technology companies

need to integrate authenticity identifiers into their products and train customers

in what to look for.

Our Electronics, Software & Services practice can help OEMs with the preventionof counterfeiting. This practice comprises multidisciplinary professionals from KPMGmember firms who can assist clients in their efforts to achieve high levels of busi-ness integrity through the detection, prevention, and investigation of counterfeiting,fraud, and misconduct. We not only help clients discover the underlying facts butalso assist in assessing vulnerabilities and in developing controls and programs toaddress risks.

Professionals in KPMG’s Electronics, Software & Services practice draw on exten-sive experience in contract compliance, forensic accounting, law enforcement,fraud and misconduct risk assessment, antifraud risk controls, program design andimplementation, asset tracing, computer forensics, and forensic data analysis.

For more information, please contact:

Gary Matuszak Petrus J. MaraisElectronics, Software & Services KPMG ForensicKPMG in the United States KPMG in South Africa+1 (650) 404-4858 +27 (21) [email protected] [email protected]

Adam D. Bates Jim HunterKPMG Forensic KPMG ForensicKPMG in the United Kingdom KPMG in Canada+44 (0) 20 7311 3934 +1 416 777 [email protected] [email protected]

Richard H. Girgenti Mark BowraKPMG Forensic KPMG ForensicKPMG in the United States KPMG in China+1 (212) 872-6953 +86 (21) 6288 [email protected] [email protected]

David J. Van HomrighKPMG ForensicKPMG in Australia+61 (7) [email protected]


KPMG’s Electronics, Software & Services Practice

The goals of the Alliance for Gray Market and Counterfeit Abatement are to protectthe authorized distribution channels and intellectual property of authorized goods toimprove customer satisfaction and preserve brand integrity.

The Alliance is a nonprofit organization composed of companies in the technologysector. AGMA’s mission is to mitigate the gray marketing fraud and counterfeiting oftechnology products around the globe. AGMA is one of the IT industry’s leadingtrade groups addressing counterfeit issues. The organization’s charter includes devel-opment of best practices for mitigating the counterfeiting of branded technologyproducts and the potential harm it causes to end customers, authorized or approvedchannel distribution partners, and the high tech industry as a whole.

Reducing counterfeiting and gray marketing activity is important for maintaining highstandards of product quality and reliability—and for ensuring that customers’ serviceand support requirements are met. By working in cooperation, member companiesimplement practical and effective deterrents to both the gray-marketing and counter-feiting of high tech products to protect intellectual property, trademarks, and copy-rights as well as to preserve brand equity.

The financial impact and customer satisfaction issues are significant. The inherentvalue of a brand is strengthened when products are delivered through approveddistribution partners, ensuring the highest quality product and the best possibleservice and support for customers. Also, by addressing unauthorized gray marketactivity, a level playing field is created for authorized distribution partners.

AGMA also established the Gray Market/Counterfeit Tip Line in efforts to help servecustomers and preserve their user experience. If you believe that you are aware ofcounterfeiting activities or illegal gray market diversion, you can contact this confi-dential e-mail address: [email protected].

For more information from AGMA, please contact:

Marla BriscoeVice President+1 (281) [email protected]

Lily MeiExecutive Director+1 (510) [email protected]


About AGMA

The information contained herein is of a general nature and is not intended to address the circum-stances of any particular individual or entity. Although we endeavor to provide accurate and timelyinformation, there can be no guarantee that such information is accurate as of the date it is receivedor that it will continue to be accurate in the future. No one should act on such information withoutappropriate professional advice after a thorough examination of the particular situation.

© 2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independentfirms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is alegally distinct and separate entity and each describes itself as such. All rights reserved. Printed in the U.S.A. 050274

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no audit or other client services. Such services are provided solely by member firms of KPMGInternational (including sublicensees and subsidiaries) in their respective geographic areas. KPMG International and its member firms arelegally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationshipof parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied, or otherwise) toobligate or bind KPMG International or any other member firm, nor does KPMG International have any such authority to obligate or bind anymember firm, in any manner whatsoever.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. KPMG Forensic is a service mark ofKPMG International. Cialis is a registered trademark of Lilly ICOS LLC. Viagra is a registered trademark of Pfizer Inc.

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ELECTRONICS, SOFTWARE & SERVICES Managing the … · ELECTRONICS, SOFTWARE & SERVICES Managing the Risks of Counterfeiting ... the audit, tax, and advisory ... Counterfeiting in the